JP Morgan becomes ‘neutral’ on US stocks after three years of ‘overweight’ position

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JP Morgan analysts believe US stocks were enjoying exceptional support from the US Federal Reserve and a strong upward trend.

U.S. equity markets rallied sharply from March lows and upped pandemic fears to end 2020 with significant gains. While the Dow Jones gained 67% between late March and December, the S&P 500 jumped 70% during the same period and the NASDAQ zoomed massive 90%. After this exceptional performance, global investment bank JP Morgan has now gone “neutral” on US equities for the first time in three years. In a recent report, the global brokerage firm said it was “ overweight ” in U.S. stocks after the 2017 reflation. It maintained this view throughout 2018, 2019 and 2020, but more now.

Policy support is gone

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JP Morgan analysts believe US stocks were enjoying exceptional support from the US Federal Reserve and a strong upward trend. The Fed’s political support now appears to be peaking. “We took profits on trade given a very good run, and a likely blockage of future technology leadership,” JP Morgan said.

The S&P 500 has now inflated more than five times since its lows in 2009. That massive surge has now pushed the index to a point where it appears stretched on most valuation measures, according to the report. “The S&P 500 cycle-adjusted P / E is currently 90% above the long-term average. Historically, from these P / E levels, real returns on capital have tended to be unattractive over the next ten years, ”JP Morgan analysts said.

Reduced growth

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The leadership of US stocks relative to other stocks in the region has been consistent with above value growth and tech stocks outperforming banks, which may no longer be the case. The report adds that strong US corporate earnings have supported the outperformance of stocks over the past two years. “Strong US earnings production supported its outperformance, and we continue to expect strong US EPS growth this year. However, the growth gap between the United States and the rest of the world may start to narrow, ”JP Morgan said.

Joe Biden to hurt Wall Street?

Going forward, under the administration of new President Joe Biden in 2021, the relative performance of the United States could be affected. “We don’t believe US policy will hurt US stocks in absolute terms, as Biden is unlikely to be able to deliver some potentially unfavorable market proposals. In relative terms, however, investor sentiment could be hampered as there is a risk of news flow with respect to some of these policies, ”JP Morgan said.

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